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I'm not a huge reader of USA Today, but I happen to be at hotel on Long Island this morning and McPaper showed up at my door this morning.

Surprising to me, there are a few interesting stories in the Money section.  So, as we usually do, let's relate them to mortgage rates.

World events work against grain buyers
Bad weather and surging global demand has created the tightest grain stock in 30 years.  Wheat prices are skyrocketing food companies have a choice -- absorb the costs, or pass them on to consumer?  Either way, mortgage rates should benefit because less dollars are being spent on capital and/or consumer goods.  A slowing economy retards inflation.

Fed chief's outlook: 'Uncertain'
Ben Bernanke says that housing is likely to be a significant drag on the economy through early 2008, and that conditions in financial markets have improved since "the worst of the storm" in mid-August.  Half of Bernanke's job is to help keep markets calm so this speech may have been a giant preview for the October 30-31 FOMC meeting. 

Oil surges to record, but gas prices don't follow suit
As with wheat prices, it's only a matter of time before producers pass on rising costs to consumers.  One major storm or cold spell and prices could rise not only at the pump, but in our homes as well.  This normally pushes mortgage rates lower because higher costs forces disposable income to drop, thereby slowing the economy.

Justin Timberlake and Scott Wolf dine at Mawat; Unaware of Mortgage Planner Dan Green
Okay, this story didn't show up in USA Today, but it happened.  I wondered why it took nine waiters to serve that table next to me until I looked over.  Neither was impressed with my new haircut.

That's all, folks.  Bring it on in to Omeletteville.

If you're a first-time reader, here's the first thing you get to learn at The Mortgage Reports:

Mortgage interest rates are determined by the price of mortgage bonds.  Nothing else, nothing more. 

If mortgage bond prices are down, mortgage rates will be higher.  If mortgage bond prices are up, mortgage rates will be lower.

That's it.  Pretty basic stuff.  Except that mortgage bond pricing information is not very accessible to the general public. 

This includes the press.

Because the mortgage-backed bond market is somewhat foreign to the media, a lot of them use a government bond called the "10-Year Treasury Note" when predicting where mortgage rates will go.  The 10-Year Treasury Note is very easy to follow because it's accessible -- just turn on CNBC or Bloomberg and you'll see it in the ticker.

And, usually, it's okay to use the 10-Year Treasury Note as a predictor of mortgage rates because the two tend to move in the same direction.  But there's no direct correlation between them.

It would be like saying that Microsoft will trade higher because Google beat its earning estimates.  Sometimes, Google will pull up the whole Technology sector, but there are plenty of days when it doesn't.

It's like dreaming about Gorgonzola cheese when it's clearly Brie time.

Unfortunately for mortgage rate shoppers, a lot of loan officers don't get the difference.  They, too, will use the 10-Year Treasury Note as a mortgage rate benchmark.  Again, most days it works, some days it doesn't.

Yesterday was one of those days.

At one point, mortgage rates were getting killed (down 19 basis points) while the 10-year treasuries were thriving (up 53 basis points).  Into the afternoon -- even as the 10-year treasury note extended its gain to 100 basis points -- mortgage bonds had barely recovered to flat.

If your eyes were on the wrong indicator, you would have expected mortgage rates to fall yesterday.  They didn't.  And this same divergence has occurred several times in August.

For people watching the wrong indicator, it may have led to costly rate lock errors.

The only security to watch with respect to mortgage rates each day is the price of mortgage-backed securities.  And if you didn't get the message this time, stick around and I'm sure I'll bring it up again sometime soon.

This week, several high-profile companies stopped funding mortgage loans including ABC, American Home Mortgage, mTeam Financial, and HLB.

What to do if you are a home buyer:

• Call your loan officer
• Confirm that your mortgage approval is not impacted

What to do if you are a home seller under contract:

• Call your real estate agent, attorney, or whomever
• Find out if your buyer's mortgage approval is impacted

What to do if you get "bad news" that your loan won't fund:

• Work with your loan officer to find a new solution
• Be flexible -- the mortgage industry is changing and this is not your loan officer's fault
• Understand that your rate and/or fees may be higher with your new loan

What to do if you loan officer's company shut down completely:

• Remain calm.  You likely have options and there is a solution.
• Email me with a few of your purchase details including (1) purchase price, (2) the loan size, (3) the expected closing date, and (4) property address
• Give me an hour or so to get back to you.  If I can't help you in your state, I will refer you to somebody that can help you and whom I trust.

Even if your closing is this afternoon and even if you are cleared-to-close, make the call.  More than $1 billion in home loans will go unfunded today (if my math is correct).

In honor of Independence Day, here are 13 little-known bits of trivia about the United States constitution, courtesy of constitutionfacts.com:

1. The first constitution was not known as the Declaration of Independence.  It was called the Articles of Confederation.
2. The U.S. Constitution has 4,400 words. It is the oldest and shortest written Constitution of any major government in the world.
3. There are spelling errors throughout the Constitution, but the misspelling of the word "Pensylvania" above the signers’ names is a notable one.
4. Thomas Jefferson did not sign the Constitution. He was in France during the Convention, where he served as the U.S. minister.
5. The Constitution was "penned" by Jacob Shallus, a Pennsylvania General Assembly clerk, for a fee of $30.
6. The entire Constitution is displayed in public just one day a year -- September 17.  This is the anniversary of the day the framers signed the document.
7. Patrick Henry was elected as a delegate to the Constitutional Convention, but declined, because he "smelt a rat."
8. The oldest person to sign the Constitution was Benjamin Franklin (81). The youngest was Jonathan Dayton of New Jersey (26).
9. When the Constitution was signed, Philadelphia was the nation’s largest city, with 40,000 inhabitants.
10. Because of his poor health, Benjamin Franklin needed help to sign the Constitution. As he did so, tears streamed down his face.
11. The first time the formal term "The United States of America" was used was in the Declaration of Independence.
12. There was initially a question as to how to address the President. The Senate proposed that he be addressed as "His Highness the President of the United States of America and Protector of their Liberties." Both the House of Representatives and the Senate compromised on the use of "President of the United States."
13. The word "democracy" does not appear once in the Constitution.

Have a safe and happy July 4th, everyone.

Source
Fascinating Facts about the U.S. Constitution
https://www.constitutionfacts.com/index.cfm?section=constitution&page=fascinatingFacts.cfm

Whenever financial markets unravel, everybody wants to ID the catalyst.  This is what caused the market to crash, or that is the reason why the markets is stinky.

Sorry to report -- markets don't crash on a single piece of news.  Don't believe for a second that New Zealand is the reason why the world is fleeing from U.S. mortgage-backed securities like cats from the Westminster Kennel Club.

And yet, that's what some pundits went on record with last Thursday when markets had their worst day in three years. 

Actually, I think somebody in the know went on record with the New Zealand bit early and then everyone else -- perhaps looking for that single reason -- jumped on the bandwagon.  It seemed like a plausible reason.

But was it?

The real story of why mortgage bonds tanked following the news from New Zealand is one that we talk about a lot over here at The Mortgage Reports.  The global economy is one big balancing act.

Growing up, I used to love the game Don't Tip The Waiter.  The waiter was this cardboard thingy balanced on a rocking chair-like base.  The object was to load as many dishes, plates, and dollar bills onto his server's plate without causing the rocking chair to pitch too far forward or backward.

If the waiter "tipped", all of the dishes fell and you lost the game.  Think "Jenga" but so much cooler for a 5-year old.

This is why the New Zealand explanation is bogus.  It's not the last event that happened before the crash, it the combination of every event leading up to and including the crash.

New Zealand merely "tipped the waiter".

The Justice Department is pressuring national tax-preparer Jackson Hewitt to close down 125 of its tax preparation stores.  Allegedly, these stores stole $70 million from the IRS. 

Each store is owned, or partially owned, by the same franchisor and are spread across four separate states.

The tax stores and its owner are accused of using fake W-2s, bogus deductions and other fraudulent claims to reduce the tax liabilities of its clients, and also of paying kickbacks to store managers and employees.

I am highlighting this story because income tax preparation is similar to mortgage planning in several ways:

1. It's not One Size Fits All -- each individual needs individual counseling
2. It's a crucial part of a person's short- and long-term financial plans
3. There are plenty of low-cost providers in the marketplace

I am not picking on Jackson Hewitt -- these stores targeted by the DOJ represent just 2% of the corporation's total franchises -- but this is a terrific example of how fraud permeates every level of every business, no matter how big or small.

There will be huge penalties for the franchise owner, but the penalties will be worse for the individuals whose tax returns will need to be amended.  Corporations have insurance and can declare bankruptcy. 

Tax penalties and liens can hurt an individual forever.

At this time of year, I get a big kick out of watching tax stores pop-up, and then fade away beginning April 15.  It creaes the notion that taxes are a seasonal thing when we all know that the reverse is true.

Taxes and tax planning is an all-year thing. 

If your accountant is a temporary employee who only works from January 1 - April 15, that should tell you something.

Look.  You are going to pay for your accounting, one way or another so make the choice to make taxes a bigger part of your plan.  It's best to work with a trusted accountant that can help you plan for the long-term and fit your tax strategy into your overall financial plan.

Need a referral?  Just ask.

Source
Jackson Hewitt accused of tax fraud in IL., 3 other states
Crain's Chicago Business, April 4, 2007
http://chicagobusiness.com/cgi-bin/news.pl?rssFeed=news&id=24475

My sources updated me.  They said: "April Fools!"

I just got a phone call from a source in Washington who is close to the ongoing mortgage industry hearings. My contact told me that Congress is convening to decide the "legality of mortgages" and the future of mortgages in this country.

No details were available, but Congress is in serious discussions to ban all mortgage lending in the United States because of fraud and foreclosure risks.

Congress believes that mortgages pose too much of a threat to our nation's financial markets.

As soon as I get more details, I will let you know.

P.S.  April Fools!

As a consumer, it's very easy to be misled by newspaper headlines.  Today provided a great example, the third in a series of stories about housing.

"New-Home Sales in U.S. Fell 3.9% to 848,000 Pace in February"

This would normally be bad news except that the Margin of Error in the survey was 17.4%.  That means that the data read could have just as easily been -21.3% as it could have been +13.5%.

The Commerce Department doesn't try to hide this, either.  At the bottom of Page 1 of their report -- not obscured in the least bit -- it's written that there is insufficient "statistical evidence to conclude that the actual change is different from zero".

Because the Margin of Error exceeds the measurement, the data measured is worthless.  The headline could have read "13.5% Gain In New Home Sales" and that would have been "true", too.

(Author's Note: If you want to know more about how Margin of Error works, check Google and find an answer that suits you.  Or, just trust me on it.)

So, today's data is misleading.  But, did you see happen to see last Friday's headlines?

"Sales of Existing Homes Up 3.9% For The Biggest Monthly Gains In Three Years"

Missed in the headline (again) was that total inventory rose, too, by 5.9%, adding more supply to the market than for which there is demand.  More supply pushes prices down and -- voila! -- the median sale price was down 1.3% from February 2006.

The headline spins positive, but the real data is neutral.

And, because things always happen in threes, did you see last Monday?  This headline made it to your preferred news source, I am sure:

"9% Jump in New Home Construction".

The headline was then followed by an article highlighting strength in the housing sector because more homes are being built.

What was not in the article?  That the Housing Starts survey's Margin of Error was 10.2% and that rendered this data worthless, too.

Housing may be strong or housing may be weak.  But, most likely, housing is both of these things.  It all depends on your particular street because all real estate is local.  Either way, look deeper than the headlines -- there's always more to the story.

A little known fact about yesterday's CPI numbers: they weren't as inflationary as you would have otherwise thought.  It all comes down to decimals and rounding.

What The Headlines Reported

• CPI: 0.2% increase in January
• Core CPI: 0.3% increase in January

What The Actual Figures Were

• CPI: 0.174% increase in January
• Core CPI: 0.256% increase in January

Annual Impact of Decimal Rounding

• CPI: 0.312% increase to CPI
• Core CPI: 0.528% increase to Core CPI

Those annual figures are astounding (and extremely dangerous).

The rounding from three decimals places to one really warps the interpretation of the data.  After all, without three decimal reporting, Ty Cobb is a career .4 hitter and Ted Williams is no more special than Ginger Beaumont at .3.

Interpreting economic growth requires precision and the current rounding-in-reporting method is anything but. 

In observance of President Ford's death, the NYSE, NASDAQ and the Federal Reserve Board will be closed Tuesday.  Markets will be closed for four consecutive days for the first time since the days following the attacks on September 11, 2001.

Even though the markets and the Federal Reserve Board will be closed, the Federal Reserve's regional banks will continue to operate as usual.  This matters to you because it means that money can still be wired between bank accounts and to title/escrow companies.

In other words, even though it will appear that monetary services are shut down for a day, mortgage loans will still be able to be funded.  Rate locks expiring on, and purchase closings scheduled for January 2 are not in any sort of danger whatsoever.

In addition, January 2 will still count as a rescission day for remortgages of primary and secondary homes.

As a follow-up to our hugely popular post last month "When Not to Schedule Real Estate Closings", I just want to remind everyone that the perfect storm is on its way this week.

This coming Friday is:

1. The last Friday in the month
2. The last day of the month.
3. It's the summer
4. It's the Friday prior to July 4th weekend.

Think about how many people you know that are leaving early this week to head to the shore, or beach, or wherever they go in your parts of the country.

A lot of them, right?

There can be as many as 20 people involved in the purchase/sale of a home, so if your closing this Friday, try to schedule it for as early in the day as possible.  Many of them are probably leaving town early this week, too.

From the above-referenced entry:

It's because title companies are like airports.  At an airport, planes are always trying to land.  It takes a complex system of organization to make sure that every plane lands on time.  If a plane landing early in the morning has some trouble, it throws off the timing of every landing later in the day.

Witness a busy airport on Thanksgiving.

In this little metaphor, the title company is the airport, and the closings are the planes.  If a morning closing has problems, it will throw off the timing of the afternoon closings.  And the more closings scheduled that day, the worse the timing problem becomes as the day goes on.

The biggest difference between a title company and an airport, though, is that the airport won't close at 5:00 P.M. on the button.

Be ready for trouble Friday -- even if your purchase closing is expected to be smooth.  Friday is the Perfect Storm (but without the bad Boston accents).

For Chicagoans, there is an added spat of terrible timing.

Friday, the Cubs are playing the White Sox at Wrigley for an afternoon match-up.  Game time is 1:20 P.M.  Chicago will be seriously shut down beginning at noon for the rarest of the rare -- the Quadruple Mortgage Witching.

Suddenly, caveat emptor takes on a whole new meaning.